Japan's politics

Advantage Fukuda

Perhaps, just perhaps, the tide is turning for the prime minister

AN ODD new phenomenon: as public approval for Japan's prime minister, Yasuo Fukuda, sinks to new lows, his standing within the ruling coalition led by his Liberal Democratic Party (LDP) is suddenly rising, stilling fevered talk of palace coups. Mr Fukuda appears at last to be articulating a message of reform. The LDP's modernisers hope it is not too late.

The change came late last month, when Mr Fukuda opened a war on two fronts. He accused the opposition Democratic Party of Japan (DPJ), which controls the upper house of the Diet (parliament), of recklessness for blocking the renewal of a special tax on petrol. The DPJ had picked on the tax, whose proceeds go to building unnecessary roads, to highlight how the LDP is in thrall to pork-barrel interests. Since April 1st, motorists have enjoyed cheaper petrol.

Mr Fukuda opened a second front inside his own party, against the construction lobby, known as the “road tribe”. He argued that the special tax should swiftly be reinstated, but also that from next year the revenues, currently earmarked for road-building, should be put into the general budget. He also called for a review of road-building plans, which will cost the taxpayer ¥59 trillion ($580 billion) over the next ten years. The road tribe is upset. But it is loth to split the party, and has no choice but to back Mr Fukuda if it is to have any revenues to fight over. Hidenao Nakagawa, an LDP powerbroker, says that an end to the earmarking of the tax is now a “certainty” and insists that the LDP's future lies with Mr Fukuda.

Kuniko Inoguchi was a minister under Junichiro Koizumi, the reformist prime minister from 2001-06. She sees shades of Mr Koizumi in Mr Fukuda's stand against his party (though, cool and cynical, he could hardly be more different in character from the maverick “Lionheart”). Many areas of the budget, she says, are in the hands of bureaucrats, off-limits to the prime minister or even the finance ministry because they are often paid for by earmarked taxes. All these are now fair game. Others go further. Kaoru Yosano, an economy minister under Mr Koizumi and a potential successor to Mr Fukuda, insists that a comprehensive tax reform, the broader context in which the earmarking of taxes needs to be tackled, is suddenly back on the agenda.

The visible glee of Mr Yosano, a policy wonk, is understandable, for Japan's fiscal situation remains dire. Though the budget deficit fell from 8.2% of GDP in 2002 to 4% last year, gross public debt has reached 180% of GDP and is rising. A survey by the OECD published this week argues that the government's target of stabilising the debt-to-GDP ratio by the middle of the next decade is based on unrealistic assumptions about growth prospects.

The power of the construction lobby proves that room exists for the government to cut spending—but not by much. In particular, Japan's rapid ageing means that spending on pensions and health care will have to rise. For now, it remains well below the OECD average. So tax revenues will have to rise if holes in the budget are to be plugged; as a share of GDP, these revenues are also below those of G7 peers.

Mr Yosano sketches out the grand bargain. Income taxes for the very rich will need to go up as a largely symbolic gesture, while today's narrow base of income tax must be broadened. (The OECD also notes that the tax code discourages labour mobility and married women going out to work.) The corporate tax base will also have to be broadened (here, the OECD argues that once a raft of tax breaks is jettisoned, corporate taxes could actually be cut, stimulating the economy and bringing in more tax revenues). Lastly, indirect taxes must play a bigger part. In particular, says Mr Yosano, the sales tax should at least double, in incremental steps, to 10%.

It is not quite impossible for Mr Fukuda to launch this formidable agenda. An early test will come on April 27th, when a by-election is held in Yamaguchi prefecture, in the south-west of Japan's main island. If the LDP vote collapses, colleagues in marginal seats may hesitate to back the prime minister in reinstating the petrol tax. But if Mr Fukuda brings his own party into line, proving to the public that he is a leader after all, then dealing with the opposition may seem like a doddle.